It's amazing how sequences in Washington can repeat themselves.
Back in June, when switching to the chained CPI was talked about as an option in the debt ceiling debate, House Ways and Means Democrats produced a JCT distributional analysis of the revenue-raising part of it. On its face, the analysis seemed to show that the chained CPI would raise taxes significantly more on lower-income earners, but it wasn't what it seemed.
We pointed out that the analysis was flawed in a few ways: it used "percent change in taxes paid" as a metric (so going from $10 to $20 in taxes would count as a 100 percent tax increase); it ignored millions of low-income taxpayers who did not file tax returns; and it assumed that AMT patches were not enacted (which would affect middle-income taxpayers). It should also be noted that the JCT analysis itself showed that the distribution of taxes paid would stay roughly the same across income levels. A week later, the Tax Policy Center came out with a distributional analysis showing that in terms of "percent change in after-tax income," switching to the chained CPI would be roughly distributionally-neutral.
Last week, in response to the inclusion of the chained CPI in Super Committee negotiations, again there was a blanket criticism of the chained CPI pointing to the JCT analysis as a drawback of the revenue impact. And, once again, TPC has produced a distributional analysis showing that the chained CPI is roughly distributionally-neutral. Also, while 30 percent of people in the bottom quintile would see their taxes go up, 97 percent of people in the top quintile would face higher tax bills. And as a share of the total federal tax change, higher-earners pay much more. The top quintile would pay over 40 percent of the tax increases from the chained CPI.
Furthermore, the Ways and Means document noted the impact of switching to the chained CPI on projected Social Security benefits would be greater for older beneficiaries because the impact compounds over time. While this is correct, giving people higher than inflation adjusted benefits makes the COLA mroe than an inflation adjustment - a COLA should be a COLA, not a raise. Keeping an outdated and incorrect measure of inflation in law is a poor substitute for boosting the retirement security of those at risk of outliving their savings. Policymakers could better target assistance to this population, such as through an old-age bump up for those over a certain age, as several bipartisan fiscal plans have proposed.
The chained CPI has come up in deficit talks over and over again because it is a more accurate barometer of the rate of inflation, allowing for programs and many features of the tax code to more correctly account for price changes. We hope lawmakers can agree to finally put it into place.
Both parties are studying cuts in tax expenditures (TEs) as a means to reduce the federal deficit. Super Committee Republicans have offered a proposal to limit the amount of tax expenditures to help generate about $250 billion in new revenues, while Super Committee Democrats have proposed an automatic trigger to limit TEs (a la the Feldstein-Feenberg-MacGuineas approach). So, this is a good time to revisit "Capping Individual Tax Expenditure Benefits," a study on an approach to limit TEs by Martin Feldstein, chairman of Reagan’s Council of Economic Advisors, NBER’s Daniel Feenberg, and CRFB President Maya MacGuineas.
They show that a TE benefits cap of 2 percent of household income (AGI) would lower the federal deficit by $278 billion in a single year. They slice and dice that sum (their Table 3) into forty-eight segments, six different TE categories across eight income groups. They also indicate annual sum savings of $208 billion if the cap were 3 percent or $110 billion with a cap of 5 percent.
Universal application of a TE benefits cap would have a nearly flat distributional effect (looking at the far right column below). Fortunately, the FFM paper also provides the data for legislation to be written to target specific distributional effects. For example, a progressive effect could be achieved by exempting the health insurance exclusion and the Child Tax Credit from the TE cap and/or by treating lower-income groups altogether separately, and/or the share borne by middle-income earners could be lowered to match top-earners’ share by excluding part of or all of the mortgage interest deduction from the TE cap.
|Effects of Excluding Specific Tax Expenditures from Cap (billions)|
|AGI (thousands)||Charitable Deduction||Property Tax||State and Local Income Tax||MID||Health Exclusion||Child Credit||Cap's % AGI Effect|
For reaching federal budget savings through tax expenditures cuts, then, lawmakers have a myriad of possibilities at their disposal.
This week has seen the emergence of another set of broad outlines from the Democrats and Republicans on the Super Committee, in a process that is somewhat reminiscent of the Boehner-Reid back-and-forth during the debt ceiling debate. After each group made offers two weeks ago, they have come back with new plans that are a little closer to the other side's liking -- but only a little. With time running out, news that the two sides are negotiating leads us to hope for a deal, and hopefully a Big deal.
Earlier this week, Republicans showed a willingness to discuss new revenues, allowing for a $300 billion increase from tax-cut-extended levels through comprehensive tax reform in their new proposal. As CRFB President Maya MacGuineas stated in a press release today,
"Democrats deserve a lot credit for proposing significant savings in health care entitlements, and Republicans deserve real credit for suggesting new revenues. The willingness of both sides to put on the table policies that ideally they might prefer to avoid shows a serious desire to compromise and bodes well for the Super Committee ultimately coming to a deal."
There are currently no details on the Republican tax reform plan, other than it calls for a top rate of 28 percent. Overall, their new proposal would save about $1.5 trillion in spending cuts and revenues (including macro dynamic effects) combined. Republicans originally offered a plan that was about $2.2 trillion in new savings and relied largely on spending cuts.
Super Committee Democrats have also offered a revised proposal. The most recent proposal keeps the 1:1 spending cut to tax increase ratio but scales back the savings from each side of the ledger to $1 trillion each. Accounting for lower interest savings leaves a total of about $2.3 trillion in the new offer. The original Democratic offer included about $3 trillion in new savings (excluding job creation proposals).
While it is very encouraging that both sides have begun taking on their sacred cows -- notably, revenues for Republicans and entitlement reforms for Democrats -- both sides need to continue to pursue a big package of savings well over the minimum $1.2 trillion required. As we've argued before, that is what we need to put debt on a downward path and it can actually improve the chances of bipartisan agreement.
|Discretionary||$400 billion||$190 billion|
|Health Care||$400 billion||$275 billion|
|Other Mandatory||$200 billion||$200 billion|
|Tax Reform||$1,000 billion||$250 billion^|
|Chained CPI||N/A||$225 billion|
|Interest||$300 billion||$200 billion|
|Total New Savings
||$2,300 billion||$1,350 billion|
Note: Numbers may not add due to rounding.
^Excludes about $110 billion from macro dynamic effects of tax reform.
There are clearly still gaps remaining between the two sides on both revenues and entitlement reforms. In order to get our debt on a sustainable path, we need the negotiating to continue seeking compromise but also to increase the total savings in the package. However, there do seem to be notable efforts on each side to try to reach an agreement, and we hope they succeed. As CRFB president Maya MacGuineas said today:
"Given the ramifications of failure with businesses, investors, and credit markets watching these negotiations closely, it is critically important that they come to a deal. It is heartening to watch how hard members of the Super Committee are working to succeed, and let’s hope that their stepping out of their comfort zone builds the environment where a deal can be reached."
Note: Estimates in table updated slightly from original posting based on mroe recent information.
How does an average American get more involved in the Go Big effort?
Today, CRFB posted a Citizens' Resource Page to answer just that. As you can expect from the name, the page provides a number of resources for citizens to get engaged in the deficit debate and plenty of links to educational resources and information about the budget.
The page provides contact information for the offices of each of the Super Committee members, as well as Congressional leadership. The page also has links to our popular educational resources such as our budget simulator or our fiscal plan comparison tool. We also included links to a few of our slide shows about the budget outlook and the Super Committee, as well as a few of our policy papers and links to websites for budget-related government agencies. It really is a great one-stop shop for anyone looking to get involved in the critical national debt discussion or become more informed about what is going on in the budget world. We encourage everyone to check it out.
Click here to check out the Citizens' Resource Page. We hope you like it!
Congressman Chaffetz (R-UT) has just proposed a Social Security reform plan to restore solvency to the program. The plan relies on reforms to the benefit side of the equation and calls for slowing the growth of benefits for higher-earners, increasing the numbers of years over which benefits are calculated, fixing the cost-of-living calculation by switching to the chained CPI, and enhancing benefits for lower-income earners and the very old, among other changes. His plan succeeds in putting the program in actuarial balance, both over the 75-year window and in the 75th year. Additionally, the plan would eliminate the program's cash-flow deficits by 2051.
The plan calls for the following reforms:
|Proposal||75-Year Actuarial Balance (Percent of Shortfall Closed)||75th Year Actuarial Balance (Percent of Shortfall Closed)|
|Gradually raise retirement age to 69 in 2034||44%||54%|
|Calculate COLA's using chained CPI||22%||17%|
|Implement progressive price indexing with new bend point at 50th percentile||41%||50%|
|Increase the number of years used to calculate benefits from 35 to 40 years||21%||17%|
|Create new minimum benefit||-5%||-4%|
|Create new old-age increase in benefits||-5%||-3%|
|Reduce benefits for higher earners||11%||8%|
|Share of Existing Shortfall Closed*||109%||113%|
Note: Estimates based off of stand-alone basis relative to current law and do not reflect interactions. Actuarial shortfall over 75 years is 2.22 percent of taxable payroll and 75th year shortfall is 4.24 percent of taxable payroll.
*Numbers may not add due to interactions.
His plan also allows for the creation of private accounts with contributions equal to 2 percent of taxable earnings, but this proposal does not as of yet have a score because some details still remain to be worked out. Nevertheless, putting in place a plan to fix Social Security is critical for future retirees since the system will no longer be able to provide full benefits -- only 77 percent, in fact -- starting 2036.
Putting a plan in place now would give future retirees the time to adjust and would expand the options available to lawmakers to put the plan in balance before the trust funds are exhausted. Congressman Chaffetz deserves much credit for being brave enough to put forward a plan at a time when both the Republican and Democratic offers within the Super Committee leave Social Security off the table. Lawmakers must embrace Social Security reform both for the sake of beneficiaries and the federal budget.
As CRFB President Maya MacGuineas stated in a press release this morning:
"There are many potential levers that lawmakers could choose from to help set Social Security and the budget on a stronger path, and Congressman Chaffetz has proposed how he would do so. He will surely take many arrows for putting a specific proposal on the table, but instead, it should be the beginning of an important national discussion on how to fix this important program."
We hope all of our beloved and faithful readers have been following the conversation developing between us and some other experts, notably at Center on Budget and Policy Priorities and at the Washington Post, over the past few days over how to reduce federal health costs while protecting the disadvantaged. It's a very important issue, and we thank these experts for joining in the conversation.
For a little background, CBPP recently argued that the Super Committee could not achieve $600 billion of health savings without harming the most disadvantaged, to which we showed a path to not only save the money but actually help many of the disadvantaged. Since then, CBPP posted a follow-up response raising questions about the options we put forward. To recap, here is what we suggested:
|Policy||Savings||Effect on the Disadvantaged|
|Reduce Provider Payments||$175 billion||X|
|Prescription Drug Rebates||$112 billion||X|
|Restrict Medigap||$93 billion||X|
|Reform Cost Sharing||X|
|Raise the Eligibility Age||$125 billion||X|
|Medical Malpractice Reform||$62 billion||X|
|Increase Income-Related Premiums||$40 billion||X|
|Total Savings||$607 billion||$280 billion||$327 billion||$0|
CBPP did not raise concerns with the Medigap, malpractice, or income-related premium changes -- but they did express concerns with the other policies. In particular, they argue:
- The $287 billion in prescription drug rebates and provider payment reductions are unrealistically high.
- Cost-sharing reforms would have serious impacts on sicker low-income beneficiaries.
- Linking increases in the eligibility age to the Affordable Care Act is not adequate to ensure protection of the most vulnerable unless or until it is successfully implemented.
These are valid concerns, so we'll address each of them (in reverse order).
Raising the Medicare Age
In our previous analysis, we showed that raising the Medicare age is progressive because -- assuming the implementation of the Affordable Care Act (PPACA) -- lower income individuals would actually become eligible for subsidies or Medicaid coverage more generous than Medicare. We suggested that to ensure this was this case, policymakers could link the increase in the age to PPACA staying in place. CBPP, however, argues that this isn't enough. As they explain:
Contrary to CRFB’s claim, simply providing for cancelation of an increase in the Medicare eligibility age from 65 to 67 if Congress repeals the Affordable Care Act (ACA) is not adequate to protect lower-income 65- and 66-year-olds, who could be left uninsured if the Medicare age is raised but the new health insurance exchanges that the ACA establishes cannot function effectively as a result of a Supreme Court decision striking down the law’s “individual mandate,” state resistance, or other factors. (This is why policymakers should not consider this proposal until we know that the exchanges are indeed functioning adequately.)
CBPP's analysis presumes an "all or nothing" trigger that just links the Medicare age increase to the continued existence of any of the health care, but this need not be the case. We won't try to design the exact mechanism in a blog, but there are numerous variations on a more nuanced trigger that would turn off the age if the subsidies are scaled back too deeply, coverage provisions are weakened, overall coverage falls below a certain level, the individual or employer mandate are not in place, etc. etc. The Secretary of HHS could even be in charge of certifying such criteria before any age increase goes into effect.
Reforming Cost Sharing Rules
The comprehensive overhaul to cost-sharing that we outlined would protect or improve Medicare for the most vulnerable. That is, it would protect those with income low enough to qualify for Medicaid support and improve the situation of beneficiaries with high costs because it would include a cap on out of pocket costs so that seniors would no longer need to fear a potentially unlimited financial burden. It also would reduce out-of-pocket costs on average, meaning that even though many more people in a given year will face higher cost-sharing (an average of $500), when netted against the average savings of $4,500 for about one tenth of beneficiaries the net result is no increase in mean cost-sharing.
Where CBPP does have a point is with regards to those who may be vulnerable, but not the most vulnerable. There will inevitably be some segment of the population which has lower incomes (but not low enough to qualify for Medicaid) and has high health care costs (but not high enough to hit the catastrophic cap). Those folks could potentially see an increase in their cost-sharing that is financially difficult to manage. But the fact that some people may be worse off is not argument enough to not provide much-needed protections and enhancements to the most vulnerable in society.
This concern could be further mitigated fairly easily. For example, overall cost-sharing could be increased some (for example, a 5 percent catastrophic coinsurance for some amount of spending over the $5,500 threshold we describe), with additional savings redirected toward providing support for lower-income beneficiaries. There are other provisions related to Medicare cost-sharing that we did not include in our initial illustrative list, such as applying the Medigap first-dollar limitation to TRICARE for Life, which could also be included in the package to achieve savings that could be used to offset additional low-income support.
Prescription Drug and Provider Payment Reforms
The illustrative approach we laid out included $112 billion in savings from allowing Medicare to use its buying power to require "rebates" from drug companies and about $175 billion from reducing payments to various Medicare providers -- including for graduate medical education, post-acute care, rural hospitals, reforming the SGR, and other payments. CBPP contends that these are unrealistic given the $200 billion and $100 billion offers in these areas from Democrats and Republicans, respectively, on the Super Committee.
Yes, we recognize that these savings would be politically difficult, but that doesn't mean these are not legitimate policies that should be seriously considered. Policymakers concerned about the impact of Medicare savings on vulnerable beneficiaries should push to achieve greater savings from areas that do not affect beneficiaries instead of assuming that achieving savings from areas such as drug rebates are impossible. In addition, the bundling of these policies reflects the Go Big approach in a microcosm: the larger the overall package is, the more room there is for Republicans to compromise on issues like drug rebates and Democrats on things like cost-sharing. Such a trade-off resulted in both policies (in some form) being in the Fiscal Commission and in the Obama-Boehner talks, highlighting that Go Big could actually improve the chance of success!
We do see CBPP's point, though, that $287 billion might be on the high side of what is achievable.The Bipartisan Policy Center did include $305 billion of such savings, but the President's submission includes closer to $220 billion and the Fiscal Commission just over $200 billion.
But if our provider payment and drug rebate suggestions are too high, there are plenty of other health savings which would have very little effect on the most vulnerable individuals. Here is around $150 billion worth of options:
|Apply Medigap reforms to TRICARE for Life||$43 billion|
|Transform FEHB into a premium support program||$31 billion|
|Increase TRICARE drug co-payments||$15 billion|
|Correct income definition for PPACA eligibility||$13 billion|
|Reduce erroneous Medicare Advantage payments||$2 billion|
|Medicaid bidding on durable medical equipment||$4 billion|
|Rebase DSH payments in 2021||$4 billion|
|Prohibit Pay-for-Delay for prescription drugs||$5 billion|
|Reduce exclusivity period for generic drugs||$4 billion|
|Medicare Part A premium for higher-earners||$10 billion|
|Restrict allocation to Medicaid of common administrative costs||$3 billion|
|Equalize Medicaid matching rates at 50% for administrative functions||$20 billion|
|Total Additional Potential Savings||$154 billion|
We think we've laid out plenty of options to reduce health care spending without hurting the most vulnerable, but this list isn't exhaustive.
We would love to hear how our readers, other groups (including CBPP!), and outside experts would save $600 billion -- or as much as they can -- in health care costs. Send us your ideas (or a link to your blog post) through the comment function of this page, and we'll highlight other approaches and ideas.
Controlling federal health spending is an absolute imperative to get our debt under control, and we look forward to ideas of how to do that in the least disruptive and most helpful way.
Today, CRFB board member and former budget director for Ronald Reagan, David Stockman, along with the former head of SEIU, Andy Stern, wrote an op-ed for CNN entitled: "If even we can agree on a big budget plan, so can Congress." Pointing to their varied backgrounds, the two authors promote a "Go big" approach, calling for $4 trillion in deficit reduction that includes both spending cuts and revenue measures. They argue that our fiscal challenges are so urgent that, even given their wide philosophical differences, they can agree that everything must be on the table.
We don't agree often. In fact, for most of our adult lives, we have worked on opposite ends of the political spectrum. One of us headed the fastest-growing union in North America, the other served as budget director for arguably the most important Republican president in the modern era, Ronald Reagan. But national crises make for strange bedfellows.
That's why we are asking Democrats and Republicans to put aside their partisan interests to secure America's future by passing a deficit reduction plan of at least $4 trillion that includes both spending cuts and new revenues.
Our debt crisis is so severe, so obvious, and the middle ground seemingly so apparent, even Odd Couple characters Oscar Madison and Felix Unger could agree on a solution. So why can't Congress and the president? If we can do it, so can they....
A deal can happen only if both sides put everything on the table. That means Democrats have to agree to entitlement reform and cuts to domestic programs, and Republicans have to accept more revenue and defense cuts.
Odd couples, strange bedfellows, whatever the terminology, agreeing on budget issues should not be this difficult. The two of us have come together despite our wide philosophical differences because we agree on one fundamental point: The fiscal crisis is so urgent that everything must be on the table. We need to act now. If the president and Congress embrace that principle, we can finally make some progress in getting our fiscal house in order and our national economy back on track.
Click here to read the full CNN op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.
With the Super Committee deadline still two weeks away, President Obama seems to be unable to wait to get some savings on the board. Today, he signed an executive order directing agencies to reduce costs in five specified areas of their budget considered to include wasteful or unnecessary spending, to which they must make 20 percent reductions by FY 2013.
While the savings that will be achieved are a drop in the bucket towards solving our fiscal problems, the order sends the right signals and should be applauded. Making our government more efficient and better allocating resources are hugely important goals. The areas that the executive order targets are:
- Travel and conference-related spending
- Duplicative or unnecessary IT devices issued to federal employees
- Unnecessary printing
- Motor vehicles
- Items used for promotional purposes
Some of these items, such as reducing travel and printing costs, have appeared in many fiscal plans as small savings policies to reduce discretionary spending. They have also been popular targets in legislation, like the CUTS Act (printing, travel, and vehicle costs, among other things) and the STOP Act (legislative printing costs).
President Obama will need these savings to fit within the Budget Control Act caps for his FY 2013 budget request, so eliminating wasteful spending makes sense before getting to the meat of the cuts. In an era of limited resources, more efficient and effective use of spending is critical in order to make budgetary room for needed investments. Thus, with some of the waste being rooted out, the Administration will be busy hammering out the larger cuts with the agencies over the next few months.
Today at an event hosted by the Center for American Progress and the American Action Forum, New York City Mayor Michael Bloomberg called on the federal government and Super Committee to go way beyond the $1.2 trillion in mandated savings to enact real reform. In his speech, he presented his own plan for how to control debt and to eventually balance the budget by 2021. He cited the lack of having a plan in place to control our debt as a real impediment to economic growth by forcing businesses to hold off on "major investment decisions until they know how Washington intends to grapple with our huge deficits." Calling on Washington to end its political gridlock, Mayor Bloomberg implored both sides of the aisle to put aside their sacred cows and stand up to their own special interests for the good of the country.
In fact, he even stated that:
"I believe the best economic stimulus is fiscally responsible, long-term deficit reduction that sends a clear signal to the private sector about Washington’s commitment to economic stability."
CRFB certainly agrees that putting in place a plan would help our economic outlook, and we welcome you to the Announcement Effect Club, Mr. Mayor!
Mayor Bloomberg stressed the importance of exceeding the $1.2 trillion mandate, noting that even if it achieves that target our fiscal problems will be no where near solved. Additionally, $1.2 trillion in savings could be wiped out by just a single percentage increase in interest rates over current projections, which would also make further adjustment more difficult. And failure cannot be an option. It would only continue to send the signal that Washington cannot get our fiscal problems solved, both economically and politically. That's not the signal we need to be sending.
He also warned that a Super Committee deadlock that caused the triggered defense and domestic discretionary spending cuts to take effect would exact a "terrible price." He called for a "bold, long-term, and comprehensive plan" that stabilizes the fiscal outlook and puts the country on a path to long-term economic growth.
Mayor Bloomberg presented his own plan for how to navigate through these challenges:
"We need a plan that looks at the economic consequences for our country – not the political consequences for the next election. And that means having the courage to admit what everyone knows: We are not going to be able to just cut our way out of the problem and we are not going to be able to just tax our way out of the problem. We must do both."
The Mayor cited all the overlap between the latest competing proposals in the Super Committee, recognizing that spending cuts and new revenues won't be easy, but are necessary. The Mayor endorsed the spending cuts found in the Simpson-Bowles plan (including the Social Security reforms), reducing a variety of tax expenditures, such as carried interest and energy tax breaks, and called for the return to Clinton-era tax rates. He argued that the threat of the tax cuts expiring would provoke a real discussion on tax reform to simplify the code and to raise revenues. Doing all of this would quite likely solve our fiscal problems and balance the budget by 2021.
We congratulate Mayor Bloomberg for offering another potential path to bipartisan agreement, and for joining with the many other business leaders, lawmakers, and experts also calling on the Super Committee to think big.
If the Super Committee fails, an automatic cut of $1.2 trillion over ten years (or whatever the difference is between the agreed upon cuts and $1.2 trillion) will be put into place starting in 2013. These cuts would be more or less across-the-board with non-interest savings stemming from defense and non-defense, though with notable exceptions. The purpose of the trigger is to force action by the Super Committee, and subsequently within Congress as a whole, because the consequence of failure would mean steep budget cuts that no one wants to see play out in reality.
Thus, it is disconcerting that there is talk from policymakers that if the Super Committee fails to come to an agreement, there would be a push to turn off the sequester or at least roll back the cuts to defense and domestic programs alike. As Erskine Bowles said in his testimony to the Super Committee last week, "The only thing worse than the committee failing to agree on savings would be if Congress followed that by voting to turn off the sequester." This is true for both halves of the sequester.
Threatening to turn off or weaken the sequester would have many drawbacks. First, it would take pressure off of the Super Committee at a time when lawmakers have a real opportunity to do something about our debt path. Given how we're facing such serious budget challenges, it isn't a surprise that cutting spending and raising new revenues will require tough political decisions. We shouldn't be taking any pressure off the Super Committee.
Secondly, ratings agencies have said that while a failure by the Super Committee would not necessarily prompt an automatic downgrade by itself, this was in part because of the sequester already being in place in order to ensure savings materialize. If the Super Committee fails and if lawmakers turn off or weaken the sequester without a viable alternative, this could undermine confidence in our economy and debt path in addition to confidence in our political system. It would send all the wrong signals: that our leaders cannot even agree on savings that they said they would just a couple months ago. But even if lawmakers did eventually enact serious fiscal reforms, a decision to waive the sequester enforcing the promised savings from Budget Control Act could undermine faith that the savings from a future deal will remain in place if there were serious efforts to weaken a trigger, let alone actual reforms. That's what could prompt another downgrade, or worse.
Granted, we don't want to have to rely on the sequester to generate the savings we need. We need smart decisions that focus on making thoughtful entitlement and tax reforms, not blunt and near-across-the-board reductions that would place a serious on the burden on the discretionary budget -- an area of spending from which $780 billion has already been cut. While there's an argument that more needs to be done on discretionary spending, the focus needs to be on entitlement and tax reform.
But the sequester is important to put pressure on lawmakers, and at least continue efforts to put the debt on a downward path if the Super Committee were to deadlock.
It is thus encouraging that Speaker Boehner (R-OH) recently said that lawmakers are "bound" by the sequester, because "[i]t was part of the agreement. And so either we succeed or we are in the sequester. The sequester is ugly. Why? Because we don’t anybody to go there. That’s why we have to succeed.” Additionally, as House Minority Leader Steny Hoyer (D-MD) has said, the sequester "ought to compel all sides towards reaching an agreement. The sequester will have harmful effects on both the defense side and the non-defense side." These are exactly the right sentiments. While the Super Committee should Go Big and exceed the $1.2 trillion in savings, failing and then turning off the sequester would be the worst possible outcome.
As policymakers look to "Go Smart" in putting together a deficit reduction package, there is no better place to look than tax reform; and in particular, corporate tax reform. According to the Joint Committee on Taxation (JCT), even a roughly 5 percent decrease in the corporate rate would increase the size of the economy by between 0.5 and 0.9 percent over the long-run, depending on how it was financed; not to mention what corporate tax reform can do to encourage international competitiveness and put industries and firms on a more level playing field.
Given the need for improved competitiveness, it's no wonder then that the Fiscal Commission called for corporate tax reform -- proposing a plan that reduced the rate to 28 percent, eliminated corporate tax expenditures, and moved to a competitive territorial system -- or that House Ways and Means Chairman Dave Camp (R-MI) released a discussion draft of a similar plan that would reduce the rate to 25 percent.
Given our mounting fiscal challenges, however, reforming the tax code cannot be a revenue-losing proposition. Because of this, corporate tax reform should be accompanied by additional tax reform measures to ensure that it is at the very least revenue neutral.
Recently, Ways and Means Democrats released a report aiming to show that the corporate rate cannot be reduced to 25 percent -- as Chairman Camp proposes -- without adding to the deficit. According to them, "A new Joint Committee on Taxation analysis shows that eliminating every corporate tax credit and deduction would generate only enough savings to reduce the corporate tax rate to 28 percent, well short of the 25 percent proposal Republicans have put forward."
And at first glance, the report does seem to conclude that -- though on closer examination it is clear that it does not. JCT puts international issues aside -- since Chairman Camp says those will be addressed in a way that makes his territorial system revenue neutral -- and attempts to estimate the effect of reducing most other corporate tax expenditures. Here are the basic results:
|Tax Expenditures Repealed||Total Savings||Savings from C Corporations|
|Expensing for R & E||$160 Billion||$150 Billion|
|Various Energy and Natural Resources||$36 Billion||$14 Billion|
|Low Income Housing Credit||$35 Billion||$33 Billion|
|Rehabilitation Credit||$6 Billion||$4 Billion|
|Deferral of Gain on Like-Kind Exchanges||$18 Billion||$16 Billion|
|Completed Contact Rules Method||$14 Billion||$14 Billion|
|Credit for Employer-Paid FICA Taxes on Tips||$8 Billion||$5 Billion|
|Domestic Production Activities||$164 Billion||$127 Billion|
|LIFO and Lower Cost of Market||$73 Billion||$66 Billion|
|Pro-rate Interest Expense Disallowance for Company-owned Life Insurance||$7 Billion||$7 Billion|
|Blue Cross/Blue Shield Deduction||$5 Billion||$5 Billion|
|ESOP Dividends||$6 Billion||$6 Billion|
|Exclusion for Private Activity Bonds||$9 Billion||$9 Billion|
|Accelerated Depreciation & Recovery||$724 Billion||$507 Billion|
|Subtotal of Base Broadening||$1,265 Billion||$964 Billion|
|Reduce Rates to 28 Percent||-$718 Billion||-$718 Billion|
|Interaction||-$243 Billion||-$243 Billion|
|Subtotal of Estimated Changes||$304 Billion||$4 Billion|
|Roughly Estimated Neutral Rate||25%-26%||28%|
Indeed, as it turns out, the reduction to 28 percent assumes that only revenue gained from C-Corps, not from pass-throughs such as S-Corps, would be used to lower rates. JCT finds that in reality, the combination of base broadening and reducing the rate to 28 percent would produce about $300 billion in revenue, enough to reduce the rate to between 25 and 26 percent. To be sure, there is a legitimate concern over fairness if policymakers choose to subsidy C-Corp rate reduction through revenue from S-Corps; and policymakers may choose not to take this route. Such concerns could also be mitigated by combining individual tax reform with corporate reform.
On top of that, it's important to note that JCT was not able to estimate the elimination of a large number of tax expenditures, including those for deferral of gain on on-dealer installment sales, special treatment of life insurance company reserves, and the exemption of credit union income. Those are currently listed as "presently unavailable," and not counted in the score. As George Callas over at the Ways & Means Committee has noted, there are 90 tax expenditures in the JCT table where they say this. Though we don't claim to be able to estimate what JCT has not estimated, it is telling that the value of these tax expenditures (on a static basis) adds up to about one quarter of the total non-depreciation tax expenditures. In rough terms, that means they could be worth $150 to $200 billion -- enough to possibly reduce the rate to 24 percent.
And then, of course, there are other options not related to tax expenditures. For example, the Wyden-Coats legislation made interest above inflation taxable to raise over $150 billion. Add that into the mix, and you could reduce the rate to about 23 percent.
* * * * *
Our basic point is that lawmakers can, indeed, reduce the corporate rate in a fiscally responsible manner -- though policymakers should be careful to pay attention to the long-term effects rather than just the 10-year score, particularly since many tax preferences are the combination of somewhat modest subsidies and quite substantial timing shifts (for example, accelerated depreciation). Given that, any reform must not only be at least revenue neutral over ten years, but also in the tenth year and beyond. To the extent that this allows for extra revenue in the interim years, they should be used for deficit reduction (as well as to finance any costs of transitioning to a new tax system).
Reforming the corporate tax code won't be easy -- reaching a target like 25 percent will require essentially wiping out all the tax expenditures on the corporate side of the code. But as lawmakers do everything thing they can to also give the economy its best chance at robust growth, we must also focus on deficit reduction. That means reforming the individual and corporate tax code, in addition to entitlement reforms, and making hard choices so the net effect of reform is to substantially reduce the deficit, even while lowering rates.
It’s About Time – If you arrived to work an hour early today then you forgot to set your clock back this weekend. The opportunity to “fall back” and gain an extra hour of time is something that busy Americans can appreciate. If only it were so simple to move the debt clock back. What would we do if we could shave a trillion dollars off the national debt? Would we do anything different, or would we remain in our sleepy daze, like most of us did with that extra hour? With less than three weeks until its deadline, the Super Committee needs all the extra time it can get. Now that daylight savings time has ended, will the time for budget savings begin in earnest? Will the political parties fall back farther into their partisan trenches, or will we move forward towards solutions?
Super Committee Urged to Spring Forward – As the clock ticks on the Joint Select Committee on Deficit Reduction to make its recommendations, it received urging from different quarters to move forward last week. At a public hearing the panel was pressed by the co-chairs of the two major bipartisan deficit commissions to come to an agreement. Erskine Bowles and Alan Simpson of the National Commission on Fiscal Responsibility and Reform and Alice Rivlin and Pete Domenici of the Debt Reduction Task Force warned of dire consequences if the committee failed to produce solid recommendations. At the end of the hearing, Bowles presented the outline of a potential compromise that could produce deficit savings of $3.9 trillion over the next decade. The next day, 100 members of the House of Representatives signed a letter to the Super Committee calling for a ‘Go Big’ approach that puts everything on the table. CRFB’s co-chairs also got into the act with an op-ed in Politico advising the Super Committee to “go big, long, and smart.”
Appropriations Better Late than Never – Overshadowed by the Super Committee, the FY 2012 appropriations process has finally started to move, more than one month into the fiscal year. A minibus containing the Agriculture, Commerce-Justice-Science, and Transportation-Housing and Urban Development spending bills passed the Senate last week and the final version is being hammered out by a House-Senate conference committee that hopes to wrap it up this week. Another minibus is set to motor on this week combining the Financial Services, Energy-Water, and State-Foreign Operations bills. In addition to the Super Committee’s November 23 deadline, Congress faces another major budget deadline as the current continuing resolution (CR) funding federal government operations expires on November 18. Another CR is likely. Have we mentioned the need for budget process reform lately?
Balanced Budget Amendment’s Time Coming – Also lost among the Super Committee debate is the fact that the Budget Control Act requires a vote in each chamber of Congress on a balanced budget amendment to the U.S. Constitution by the end of the year. House leaders have indicated they will hold a vote the week of November 14. The Senate has not signaled when it will vote. There are lots of different versions to choose from. No matter what version gets a vote, it is not likely to get the 2/3 majority needed from each chamber to move forward to the states, where 3/4 of them would need to ratify it.
Fiscal Policy Gets Time on the Campaign Trail – GOP presidential candidate Mitt Romney gave a speech on fiscal policy on Friday in which he outlined some budget cuts he would make. There will be more fiscal talk on Wednesday as the candidates face off in a debate on economic, tax, and national debt issues in Michigan.
Soldiering on with Budget Cuts at Pentagon – The New York Times looks at the task facing Defense Secretary Leon Panetta as he seeks to cut at least $450 billion from the Pentagon budget. Panetta Tells the Times that another round of base closings might be required, as well as reductions in the U.S. nuclear arsenal, force reductions in Europe, and cutting the F-35 Joint Strike Fighter program. He also says he might create a commission to review military compensation. Panetta also says that the $500 billion in defense cuts triggered if the Super Committee fails to act could be disastrous.
Key Upcoming Dates (all times ET)
- GOP presidential debate in Rochester, MI sponsored by CNBC exclusively on the nation's economic challenges including the national debt, jobs, and taxes at 8 pm.
- Treasury Department releases federal budget data for October at 2 pm.
- GOP presidential debate in Spartanburg, SC sponsored by CBS News and the National Journal at 8 pm.
- GOP presidential debate in Washington, DC sponsored by CNN, the Heritage Foundation and the American Enterprise Institute at 8 pm.
- Continuing resolution (CR) currently funding federal government operations expires.
- The Super Committee is required to vote on a report and legislative language recommending deficit reduction policies by this date.
- GOP presidential debate in Arizona sponsored by CNN at 8 pm.
- The Super Committee report and legislative language must be transmitted to the President and Congressional leaders by this date.
- Any Congressional committee that gets a referral of the Super Committee bill must report the bill out with any recommendation, but no amendments, by this date.
- GOP presidential debate in Des Moines, IA sponsored by ABC News at 9 pm.
- GOP presidential debate in Sioux City, IA sponsored by Fox News at 9 pm.
- GOP presidential debate in Johnston, IA sponsored by PBS NewsHour, Google and YouTube at 4 pm.
- Congress must vote on the bill recommended by the Super Committee by this date. No amendments are allowed.
- Both houses of Congress must vote on a balanced budget amendment to the U.S. Constitution, as required by the Budget Control Act.
January 3, 2012
- Iowa Caucuses.
January 10, 2012
- New Hampshire Primary.
January 21, 2012
- South Carolina Primary.
January 31, 2012
- Florida Primary.